People’s Bank of China eases bank reserve requirements to support the economy

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2020 will — economically, anyway — be shaped in no small part by what happens in China.

The world’s second-largest economy has been on a slide in terms of GDP growth for years now. The 18-month trade war with the U.S. has contributed to that decline and has been the cause of considerable investor anxiety.

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But while 6.8% in 2017 has given way to at best a low 6% number last year, it should not be forgotten the economy is twice the size it was 10 years ago; so, 6% growth now is the equivalent of 12% growth in terms of trillions of demand added each year.

Not that many believe the official figures. Work by a number of Chinese and American economists reported in the National Interest last year suggests China has consistently been over-reporting growth figures by, on average, some 1.7% per annum for more than 10 years.

Still, that aside, China plays a large role in global trade and an outsize role in metals consumption and supply that makes the health of the Chinese economy of particular interest to metals consumers.

In that respect, action this week by the People’s Bank of China (PBOC) to reduce large bank reserve requirements from 13% to 12.5% from Jan. 6 has been well-received and resulted in a surge in the Shanghai stock market.

The move is expected to result in the release of about 800 billion yuan ($115 billion) in the form of new lending at a time when companies typically borrow more ahead of the Chinese New Year holidays and local governments are issuing bonds to fund infrastructure investments.

According to Bloomberg sources, reducing bank reserve limits is a softer form of stimulus than reducing the loan prime rates, a move that the PBOC has already done three times this year and expected to do so again at some point later in the year ahead.

Beijing is wary about surging Chinese inflation, exacerbated by swine flu requiring the slaughter of half the country’s pig stocks and resulting in skyrocketing meat prices. Inflation is already at 4.5% and the authorities are wary about stoking a property boom that would undermine their reputation for economic management.

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China’s manufacturing sector continued to expand output in December, building on a positive showing in November and suggesting the economy may have turned a corner.

No countries are likely to show strong growth in 2020. However, if both the U.S. and China are in positive territory, there is every chance that talk of recessions will be just that: talk and nothing more.

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